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Bank Recapitalisation and Sovereign Debt Restructuring
The failure of a sovereign usually leads to widespread banking failures and the
resolution of an entire banking system would bring the sovereign into difficulties.
This problem is particularly acute within the euro area, but it could be
manageable. Forcing banks to hold capital on their holdings of government debt would make a sovereign failure less disruptive. Bank resolution could be made simpler with a more clearly defined ‘waterfall’ of priority claims (depositors prior to bond holders).
resolution of an entire banking system would bring the sovereign into difficulties.
This problem is particularly acute within the euro area, but it could be
manageable. Forcing banks to hold capital on their holdings of government debt would make a sovereign failure less disruptive. Bank resolution could be made simpler with a more clearly defined ‘waterfall’ of priority claims (depositors prior to bond holders).